FAQ Non-Profit

Non-Profit FAQ

Should I form a nonprofit entity?

The decision whether or not to form a nonprofit entity depends on several factors.

Do you wish contributions to be tax deductible?
Will donations be made annually for a period of years, perhaps indefinitely?
How much control do you wish to have over the donated funds?
Are there existing entities to whom you can donate that fulfill the same role?
Do you have individuals who would be willing to serve on the board of directors long term?

In order to make tax deductible contributions for a charitable purpose, it is necessary to donate to a US nonprofit entity. You can donate to an existing nonprofit or form a new one specifically designed for your charitable goals.

Does it cost less because it is a non-profit?

Forming a nonprofit entity is more costly than forming a “for profit” corporation. This is because there are additional filings required by the IRS, Franchise Tax Board and California Attorney General, and these additional filings can be labor intensive. In the event that the nonprofit sells goods or owns real estate, there will be more filings with the State Board of Equalization and the county property tax authorities.

For entities that expect gross receipts not exceeding $50,000 per year, we can utilize the simplified exemption application provided by the IRS which, in addition to requiring less information, also requires a smaller fee.

Because the costs of formation are significant, it is important to determine whether the nonprofit will be useful long term or short term. The expense of forming a nonprofit may not be warranted if the need is short term, and it may be better to donate to an existing nonprofit instead. One advantage of donating to an existing nonprofit is that you avoid the time and expense of forming and maintaining a new entity. Disadvantages of donating to an existing nonprofit are that you will have more limited control over the use of the funds, and you lose the benefit of long term planning and oversight offered by a dedicated board of directors. It would be helpful to identify any existing nonprofits that currently serve the purpose you wish to serve and consider pursuing your charitable goals through the existing entities.

If such an organization does not currently exist, and if you have dedicated individuals willing to serve on the board of directors and wish to make a long term commitment to your charitable goals, it may be most effective and economical to form a new dedicated nonprofit entity.

What are the advantages of forming a nonprofit entity?

Some advantages of forming a new nonprofit include the following.

Creating a new nonprofit allows you to establish the mission of the entity.
You can designate directors in order to keep the nonprofit on track.
Nonprofits are exempt from corporate income tax.
Contributions to the nonprofit are tax deductible.
Nonprofits are eligible to solicit donations from the public and grants from other foundations.
Having a formal corporate structure makes the entity separate from its founders and provides limited liability.

What are the disadvantages of forming a nonprofit entity?

Some disadvantages of forming a new nonprofit include the following:

Forming and maintaining a nonprofit takes time and money.
Nonprofits must keep detailed records of donations, expenses and distributions.
Nonprofits must fulfill all annual filing requirements or risk losing exempt status.
Financial records are open to the public.

How can I maintain control over the nonprofit entity?

While nonprofits’ assets are dedicated to the public, and nonprofit entities do not have shareholders, it is possible to increase the level of control over the assets by giving certain directors or individuals additional powers. For example, California Corporations Code Section 5211(a)(7) permits the articles or bylaws to require the presence of certain specified directors in order to constitute a quorum. Section 5220(d) states that the articles or bylaws may provide that all or some of the directors may be designated by a “designator” or “designators”. The Designators may continue to designate directors until death or incapacity. Section 5222(f)(2) further provides that designated directors may be removed by the designator.